The Relationship Between Capital Controls And Inflation In Colombia

The Colombian economy is undergoing one of the best economic times in the last 50 years. Colombia grows stronger. In 2007, the economy grew 7.52%, investment in the country are increasing, growing foreign direct investment in Colombia and domestic demand is becoming stronger. But in the midst of this moment of glory of the Colombian economy, inflation appears as a large black cloud that threatens to spoil this great moment. Inflation in Colombia has been increasing and their authorities concerned must face several dilemmas to solve this problem.

In May, the Consumer Price Index (CPI) rose 0.93%, the highest rate for that month since 1999. Already in the first five months of the year, consumer inflation in Colombia reached 5.12% and 6.39% in the last 12 months. It is worth remembering that the Central Bank of Colombia, has an inflation target of 4% with a range of half a percentage point in both directions. Clearly, the rate of inflation month month moving away from the goal. That is why, motivated by developments in prices, a week ago, the Central Bank of Colombia had left unchanged interest rates. It is at 9.75%. According to the Central Bank: “The Board noted that inflation and inflation expectations remain at levels exceeding their goals, which also happens with several of the core inflation indicators.” It is not only concerned about Central Bank’s current inflation data, but also the dynamics that is showing strong consumer finance, which is an issue that the monetary authority follows closely because of the impact of this phenomenon in domestic demand ( and consequently, inflationary pressures).